Hydrogen can help Australia hit net-zero carbon emissions and become a green energy superpower - but only if it gets targeted government support.
A new Grattan Institute report, Hydrogen: hype, hope, or hard work?, calls on the federal government to promote hydrogen use in the production of ammonia, alumina, and iron.
The cost to the government would probably be about $0.6-2 billion per year.
But the prize for Australia would be reduced emissions from domestic production of ammonia, alumina, and iron, and new export industries that ultimately wouldn't need subsidies.
In each of these commodities, hydrogen faces a 'green premium' - the gap between the cost of using hydrogen for zero-emissions production, and the cost of conventional production.
The government should do three things to help close that gap.
First, bring down the price of electricity, by improving renewable energy generation, storage, and transmission.
Second, lift the price of carbon. Heavy industry is covered by the government's Safeguard Mechanism, which imposes a carbon price to drive down emissions. But under the mechanism's current settings, this price isn't likely to be high enough to close the cost gap.
Third, use industry policy to underwrite demand for 'green' versions of ammonia, alumina, and iron.
This three-pronged strategy should be coordinated with other policies supporting green products, including critical minerals, as part of a comprehensive Australian green industry policy.
The government should be more cautious about supporting hydrogen uses such as long-duration energy storage and long-distance road freight, because it is not yet clear whether using hydrogen is the best way to decarbonise these activities.
And it should rule out further investment in hydrogen uses unlikely to be viable, including for replacing natural gas in homes and commercial buildings, and replacing petrol and diesel in cars and utes.
'We need to dial down the hype about hydrogen - it's now clear it will not be the sole clean fuel in a net-zero world,' says report lead author and Grattan Institute Energy and Climate Change Program Director Tony Wood.
'The reforms recommended in this report would help Australia to hit net zero by 2050 and give us the best chance to build a hydrogen industry that can fuel export industries and boost national prosperity.'
